Colin: The world is full of pundits who predict that China will, sometime in the first half of this century, overtake the United States as an economic power. The only difference between them is when this will happen. STRATFOR doesn’t believe this will happen and as China’s economy slows down while facing inflation, many others have doubts also. For his latest assessment, we turn to George Friedman, who we welcome back to Agenda.

George, China argues that the United States should treat it as an equal. For the United States, this seems a step too far. Is this a chasm that can be resolved peacefully?

George: The United States doesn’t treat China as an equal or an unequal, it treats it as China. As a country it has interests and those interests may coincide with American interests or they may not. But the United States, and any other country treats any other country as its interests. In many cases, the problem really is that observers of China have bought into the Chinese view that China is a superpower economically, militarily, politically, and therefore the United States should it treat it as such. But the fact is that China is far from a superpower in any of these realms. It remains a relatively weak economic power and certainly a weak military and political power, and the United States treats it as it is: a significant regional power with a great many weaknesses, and when it threatens American interests, the United States is quite happy to slap it back.

Colin: With the possibility of confrontation between the world’s first and second largest economy troubles many countries in the Asia Pacific region. First of all Japan and Korea but also many nations of Southeast Asia: Indonesia, Vietnam and a resources giant, Australia.

George: Well I mean it’s interesting that they’re troubled. I must admit that I’ve never understood what it meant for a nation to be troubled—I understand people being troubled. Look, there can’t be confrontation militarily between the United States and China. Firstly because the United States is incapable of intruding on mainland China militarily—it’s a vast population, a large army. And China has no naval capability worthy of the name. They have launched their first aircraft carrier. That means they have one aircraft carrier. They don’t have the cruisers, they don’t necessarily have the advanced attack submarines, they don’t have the Aegis defense systems. In other words they’ve launched a ship and now they have to train their pilots to land and takeoff from the ship and the aircraft that take off from the ship have to be able to engage and survive American F-14s. The distance between being a challenge to the United States and having one aircraft carrier is vast and generational. Not only do they have to train the people to fly off the deck, they have to train naval commanders, admirals, to command carrier battle groups, and even more admirals who know how to command groups of carrier battle groups. The United States has been in the business of handling carrier battle groups since the 1930s. The Chinese have not yet floated their first carrier battle group, and one isn’t enough. So it’s really important to understand that while China has made a minor movement in floating aircraft carrier, a technology that is now just about 80 years old—that’s very nice but it does not make them a power.

Colin: Now, financial analysts and economists talk up China as an economic power but at STRATFOR we’re doubters. China has slowed down this year, but do we still believe that Chinese growth is unsustainable?

George: The question of Chinese growth is the wrong question. I can grow anything if I cut profit margins to the bone or take losses. According to the Chinese Ministry of Finance, Chinese profits on their exports are about 1.7 percent, which means that some of these people are exporting at almost no level. The Chinese grow their economy not in the way that Western economies grow that when you sell more products, you make more money. The Chinese grow their economy to avoid unemployment. The Chinese nightmare is unemployment because in China unemployment leads to massive social unrest. Therefore the Chinese government is prepared to subsidize factories that really should be bankrupt because they’re so inefficient in order to keep these companies going. They will lend money to these companies not to grow them but in order to make certain that they don’t default on other loans. So I think one of the mistakes we make is the growth rate of China being the measure of Chinese health. I want everyone to remember that in the 1980s Japan was growing phenomenally and yet their banking system crashed in spite of the fact of having vast dollar reserves. So when you look at the Japanese example you see a situation where growth rates, which Westerners focused on, were seen to be a sign of health when in fact they were simply a solution to a problem of unemployment and underneath it the economy was quite unhealthy. This doesn’t mean that China doesn’t have a large economy, but having a large economy and being able to sustain healthy, balanced growth are two very different things.

Colin: Wouldn’t it be in the interests of both countries to find more common ground, perhaps to work together to make the Western Pacific a zone of peace involving Japan and other countries?

George: Well first of all, there is a zone of peace in that region. There’s no war going on. Secondly, the guarantor that it’s a zone of peace is the American 7th Fleet—the Chinese can’t do anything about it. As for tension bubbling about, so much of this is what I’ll call newspaper babble. Some minister or some secretary says something hostile, something is said—these are merely words. Here’s the underlying fact: China cannot sell the products it produces in China because over a billion people living in China live in absolute poverty and can’t buy it. They’re the hostage to European and American consumers, and their great fear is that those consumers, if they go into a recession, won’t buy those products. The problem the Chinese have is that they can’t invest their own money into the Chinese economy—there’s no room to put it, there aren’t enough workers, there’s not enough land and so on. So they have this massive hangover that they’re willing to invest in the world to get out of China. So there is a very good relationship between the United States and China. The Chinese get to sell products to the Americans; the Americans get these products. The problem the Chinese have is that their wage rates are now higher than those of other countries. It is cheaper to hire workers in Mexico today than in China. Their great historic advantage is dissolving yet they must continue to export. The American desire that the Chinese change the value of the yuan, that they float it, of course will never happen. The Chinese can’t afford to let that happen because of course that would make their exports even more expensive and place them in even more difficult trouble. So the United States enjoys jerking their chain by saying they should float the yuan. The Chinese respond saying that they will do that in a few years as soon as something else happens that’s unnamed. And the Chinese condemn the United States for their naval activities, and all of these are words. These two countries are locked together in a very beneficial relationship. In the long run it’s more beneficial to the United States than to the Chinese, and that’s one of the paradoxes. But again it takes a long time for people to realize that economies have failed or recovered. I remember back in 1993, people were still speaking about the Japanese super-state long after the banking system collapsed. One of the interesting things about the global financial community is that they always seem to be about two years behind reality, and the China situation is that they are in the midst of a massive slowdown. They’re admitting to a certain degree of slowdown—we suspect it’s much more substantial than that. In fact, given Chinese inflation rate, they may be entering negative territory. So this is a country that has had a magnificent run up in 30 years, it is going to be an important economic and military and political power over the next century but for right now it’s got problems.

Colin: George Friedman there, ending the Agenda for this week. Thanks for joining us, and until the next time, goodbye.